How a Slow Economy Affects Mortgage Refinance Rates

Mortgage refinance rates tend to fluctuate based on the state of the economy. Due to the federal bailout of Fannie Mae and Freddie Mac, the mortgage rates have been low. This prompted many home owners to wonder whether they should take advantage of those rates and refinance. However, there is more to mortgage refinancing than low mortgage rates. In the aftermath of the most recent mortgage crisis, mortgage requirements have tightened, making it harder to qualify for a new loan than ever before. So while getting a good deal when they refinance their mortgage, it won't be as easy as many people would assume.

Mortgage Refinancing Basics

Mortgage refinancing is the act of using an existing mortgage to finance the purchase of another mortgage. It was originally created as part of Franklin Roosevelt's New Deal program. It aimed to help homeowners avoid foreclosure by allowing them to trade their mortgages for mortgages with more favorable terms. This included lower interest rates, smaller regular payments and lower risk. The current laws allow homeowners to refinance their mortgages as often as they want.

Qualifying for Mortgage Refinancing in a Slow Economy

What many homeowners fail to realize is that just because they want to refinance on their mortgage doesn't mean they would necessarily be able to. When they applied for their original mortgage, they had to show their lender that they don't pose a financial risk. The same is true when they try to get another loan via mortgage refinancing. With the housing market at the lowest it has been in years, lenders have become more careful and stringent with their requirements.  Furthermore, many homeowners face financial hardship as they got laid off, defaulted on their loans, lost their investments, etc. A homeowner who was able to qualify for a mortgage a few years ago may not be eligible for the same kind of mortgage today.

In order to qualify for mortgage refinancing, most lenders will require homeowners to meet at least some of the following requirements:

  • They must have at least 20% equity in their home
  • Their credit score over 600.
  • They must be able to show that they've been able to earn income for the past two years. This can be done by showing copies of their tax returns.
  • Their total debt payments must be less than 45% of gross their income. This figure includes the value of their current mortgage.

Homeowners that can't fit those requirements and whose mortgage is owned by Fannie Mae or Freddie Mac may be able to qualify for mortgage refinancing under Home Affordable Refinance Program. For more information, visit http://makinghomeaffordable.gov.

Mortgage Refinancing Rates vs. Other Costs - Getting the Best Value

One of the biggest benefits of mortgage refinancing is that homeowners get an opportunity to get a mortgage with lower interest rates. Those who have a mortgage with variable interest rates have a chance to get a fixed rate mortgage. However, mortgage refinancing comes with other fees that, when put together, may outweigh whatever money homeowners may be able to save by switching to lower interest rates.

For the most part, those expenses are loan preparation fees such as appraisal fees, credit report fees and application fees. Many insurance companies would be willing to negotiate on the value of the fees and, in some cases, waive them altogether.

To get some sense of what kind of fees that they may face, homeowners have a right to demand a Good Faith Estimate. It represents the lender's best guess on the matter. The actual fees may wind up being higher or lower than the Good Faith Estimate, but they aren't usually off by much.